© Copyright 2014 Saul Ewing LLP Legal and Business Issues George W. Bodenger, Partner Saul Ewing LLP (215) Healthcare Financial Management Association Western Pennsylvania Chapter April 17, 2014 Mergers & Acquisitions in the Healthcare Industry Focus on Medical Practice Acquisitions 1

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© Copyright 2014 Saul Ewing LLP Topics to Be Covered Healthcare Merger & Acquisition Landscape Hospitals & Physicians & Others Pursuing Medical Practice Acquisitions Primary Bodies of Law Affecting Medical Practice Acquisitions Fundamental Issues for Buyers & Sellers of All Types Structuring Challenges by Type of Buyer Key Steps in Transaction Process 3

© Copyright 2014 Saul Ewing LLP Healthcare Merger & Acquisition Landscape M&A Market Trends Hospitals Merging or Being Bought/Sold at Increased Rate Other Healthcare Business “Rollups” – Urgent Care, Home Health, Wound Care Healthcare Reform Continues to Drive M&A Transaction Flow BUT Physician Practice Acquisitions are Most Common Transactions in Healthcare Today Hospitals Acquiring Medical Practices “Physician Only” Medical Practice Integration Specialty Physicians and Private Equity Healthcare Providers and Health Plans 4

© Copyright 2014 Saul Ewing LLP Healthcare M&A Landscape – continued Medical Practice Acquisitions Hospitals & Physicians Continue Moving Toward Practice Acquisition/Employment  Tangible Assets Only (i.e., no “goodwill”)  Cost-based Approach to Valuations – Cost of Recreating Practice Hospitals and Physician Groups Developing Alternative Arrangements  Gainsharing  Co-Management Agreements New Players in the Marketplace – MOST IMPORTANT  Private Equity  Insurance Plans 5

© Copyright 2014 Saul Ewing LLP Hospitals & Physicians & Others Pursuing Medical Practice Acquisitions Hospitals are Pursuing Because: Physicians Control Patients Recruit High End Specialties Improve Physician Cooperation Stabilize Medical Staff Physicians Are Pursuing Because: Strength in Numbers Spreading Infrastructure Cost & Risk Increased Access to Ancillary Services Private Equity/Insurers Present Attractive Alternatives for Physicians Access to Capital Maintaining Physician Entrepreneurship No “Been There, Done That” 6

© Copyright 2014 Saul Ewing LLP Primary Bodies of Law Affecting Medical Practice Acquisitions Anti-Kickback Statute Physician Self-Referral Restrictions (“Stark Law”) Corporate Practice of Medicine 501(c)(3) (Exempt Organization) Law 7

© Copyright 2014 Saul Ewing LLP 8 Elements of Anti-Kickback Statute Knowing and willful Solicitation, or receipt/offer for payment Remuneration (direct or indirect, overt or covert, in cash or in kind) Inducement In return for referrals, or in return for purchasing, leasing, ordering, arranging or recommending Patients, goods, facilities, services or items for which payment may be made in whole or in part under a Government Health Care Program

© Copyright 2014 Saul Ewing LLP 9 Federal Anti-Kickback Statute - cont’d Unlike Stark, Criminal Statute – Intent Requirement “One Purpose” Test (see Greber) Failure to Satisfy Safe Harbor Not Illegal “Per Se ” Exposures Felony - punishable by criminal fines up to $25,000 and/or imprisonment for up to five (5) years, potential False Claims Act exposure, potential civil sanctions and monetary penalties, including exclusion from Medicare & Medicaid programs

© Copyright 2014 Saul Ewing LLP 10 AKS Safe Harbors Relevant to Medical Practice Acquisitions Bona Fide Employees Sale of Practice Investment Safe Harbors

© Copyright 2014 Saul Ewing LLP 11 Elements of the Stark Law Physician (or immediate family member) Makes a referral To an entity that furnishes DHS With which he/she has a “financial relationship”  Ownership/Investment  Compensation Unless an exception applies – VIOLATION!!

© Copyright 2014 Saul Ewing LLP 12 Stark Law Exceptions Relevant to Medical Practice Acquisitions Bona Fide Employment Isolated Transaction

© Copyright 2014 Saul Ewing LLP 13 Tax Exempt Organization Law IRC 501(c)(3) – Prohibits Inurement to Private Shareholders or Individuals Affects All Compensation Arrangements between 501(c)(3) Hospitals and Physicians Prohibitions on “Private Inurement” and “Impermissible Private Benefit” Compensation Must be “Commercially Reasonable” and Consistent with “Fair Market Value” Rev. Proc : Provision of Recruitment Incentives to Physicians by Tax-Exempt Hospitals

© Copyright 2014 Saul Ewing LLP Medical Practice Acquisitions Fundamental Issues for Buyers & Sellers of All Types Purchase of Assets versus Purchase of Stock Subchapter “C” versus Subchapter “S” Corporation Fraud & Abuse Successor Liability Physician Employment Failure to Document Employment Relationship – “technical” violations of AKS and Stark Poorly Drafted Restrictive Covenants Stark Law – Limitations on Patient Referrals Fair Market Value, Productivity/Value Based Compensation No “Salary Caps” (exempt organization only) Strategic/Other Organizational Structure Autonomy & Flexibility Geographic Coverage versus Consolidated Locations 14

© Copyright 2014 Saul Ewing LLP Medical Practice Acquisitions Structuring Challenges by Type of Buyer Hospitals/Health Systems Corporate Practice of Medicine – Challenging to Employ Physicians Exempt Organization Law Cannibalizing Ancillary Services Private Equity Completely New Industry Valuation Concerns Physician Ownership Limitations Ancillary Business Upside Insurance Plans Health Reform Favors Insurer/Provider Integration Corporate Practice of Medicine – Unable to Employ Physicians Outright No Ancillary Business Upside 15

© Copyright 2014 Saul Ewing LLP Key Steps in Transaction Process Confidentiality & Non-Disclosure Agreement Term Permitted Disclosures Sharing of Financial and Statistical Information Steps at Termination of Negotiations Negotiation of Key Business Terms Purchase Price Compensation Letter of Intent Exclusive Dealing Due Diligence Steps at Termination of Negotiations Transaction Documents Asset Purchase Agreement Employment Agreement 16

© Copyright 2014 Saul Ewing LLP Questions? George W. Bodenger, Esq. Chair, Health Law Practice Group Telephone: (215) Saul Ewing LLP 17

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